Taxation

Rupert Clarey, a partner at global advisory and administration firm, Maitland, explains how the UK Government’s new finance bill will impact the taxation rules for non-doms – and how individuals can best prepare for the changes ahead.

The Bill will implement many of the tax changes that were dropped from the previous Finance Bill following the surprise call of an early UK General Election.

These include the changes to the taxation of non-UK domiciliaries (non-doms) by introducing a new deemed domicile regime, and the legislation extending inheritance tax (IHT) to UK residential property held through offshore companies.

It is confirmed that the legislation will be passed into law in substantially the same format as the previous draft legislation published earlier this year, although some clauses will be updated. HMRC is likely to release further technical guidance later in the year.

What this means is that non-doms who have been resident in the UK for 15 of the previous 20 years will be considered ‘deemed domiciled’.

This means they will be subject to tax on all income and gains wherever it arises and will not be able to take advantage of the beneficial remittance basis tax regime. They will also be subject to IHT on all their assets wherever they are situated.

Similarly, once the Bill is passed, shares in a non-UK company which owns UK residential property will have been within the inheritance tax net since 6 April 2017.

Individuals who have become deemed domiciled in the current 2017/18 tax year will be able to ‘rebase’ personally held overseas assets to their market value at 5 April 2017 for CGT purposes.

This means that only the value attributed to the post 6 April 2017 element will be immediately subject to capital gains tax on a later disposal.

‘Cleansing’ of offshore mixed funds will also be available, allowing separation of tax-free capital from foreign income and gains.

The draft clauses have provided some further clarity, but uncertainties remain and taxpayers will have to wait until the autumn for publication of the Bill and HMRC guidance to understand how the provisions will operate.

However, what is clear is that if non-doms work within the rules, money which could not previously be brought to the UK without a tax charge can now be segregated and some of it used in the UK tax free.

The ‘protective’ rules which apply to trusts established by non-doms before they become deemed domiciled will also come into force.

Broadly, if such trusts are not added to, then income or gains earned by a foreign trustee is not taxed in the UK unless distributed or used to provide a benefit to UK residents and the trust assets will remain outside the scope of IHT.

Whilst charges of this sort and this magnitude were bound to cause uncertainty amongst non-doms, coupled with delays and postponements, what is clear is that the UK continues to offer a very attractive tax regime for wealthy non-British nationals coming to the UK temporarily, even where they stay for up to 15 years.

After initial worries, the industry seems to largely view the new regime as fair and well balanced while clients are ready to adapt to the changes.

For now, non-doms should be planning on the basis that the rules are already in effect, and those non-doms who have been resident in the UK for 15 of the last 20 years should manage their affairs on the basis that they are deemed domiciled from 6 April 2017.

In mid November 2017, the Finance Bill received Royal Assent.  AIG Life said the reforms which have most relevance to financial protection include:

• Non-domiciled individuals (“non-doms”) who have been resident in the UK for 15 of the previous 20 tax years (previously 17) are now ‘deemed domiciled’ for inheritance tax (IHT) purposes.
• Individuals born with UK domicile, but who have since established a non-UK domicile of choice, will be liable to IHT on their worldwide assets (as though they were still UK-domiciled) if they are resident in the UK.
• Offshore structures holding UK residential properties - previously exempt from IHT - will now be ‘looked through’ and give rise to an IHT liability.

In a separate development when examining taxation, the latest Avalara Brexit Survey first carried out in September 2016 with over 70 international tax and accounting professionals, uncovered that 76% of those surveyed now anticipate a ‘hard’ Brexit, with the UK moving to World Trade Organisation-set tariffs.  

According to the survey, 93% of respondents believe EU VAT changes following Brexit will affect their business.